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Goldman Sachs analysts downgraded Paramount Global to “sell” from “buy” on Tuesday, under the premise that the company will not be able to execute on its streaming platform in a difficult macroeconomic environment.
“We have not changed our view that PARA’s rich IP and scaled content production assets could support a sizable streaming business, over time. However, we believe the market is unlikely to underwrite this long-term potential as the near-term operating environment becomes more difficult,” the analysts wrote.
Paramount is already trading at a premium to others in its peer group, yet the stock has underperformed compared to the overall market, the analysts say, due to weakness in the company’s legacy media segments and due to increased competition in the streaming market.
Amid the heightened competition, Paramount will need to increase its content investment to stay in the game. The analysts estimate the company will aim to increase its direct-to-consumer content spending to $8 billion annually by 2026.
However, this may not be a possibility as economic headwinds pressure the company’s advertising revenues, and further strain Paramount’s operating income and free cash flow, which the company has already said will decline in 2022 and 2023 due to increased investment in content.
“Put another way, as the near-term operating environment becomes more difficult, so do PARA’s choices,” the analysts wrote.
This stands in contrast to their view on streaming competitor, Warner Bros. Discovery, which the analysts reinstated coverage on with a “buy” rating. The difference here is that the analysts believe the stock price is already reflecting the remaining complexities of integrating the two companies, as well as the management’s need to cut costs while in an inflationary environment.
The stock is not, however, reflecting the potential of its streaming business, which the analysts view as even stronger once the company fully integrates HBO Max with Discovery+.
“In other words, we believe the market is assigning no material value to WBD’s Direct-to-Consumer streaming business. As such, we believe early traction with the company’s planned all-inclusive streaming service could be a positive catalyst for the stock,” the analysts wrote.
The opportunity in that streaming service comes due to the number of media brands operating under Warner Bros. Discovery, which include HBO, TBS and Eurosport, CNN, HGTV and Food Network and the Warner Bros. studio, the company’s extensive library and its wide distribution network. With one fully integrated streaming platform, Warner Bros. Discovery could use Discovery’s relationships with global pay-TV distribution partners to broaden viewership, or rely on further strategic partnerships, such as Discovery+’s distribution deals with Verizon and SiriusXM.
Further, analysts believe in the ability of Warner Bros. Discovery management to cut down on spending, as evidenced by the swift shutdown of CNN+, pointing to their ability to meet targeted goals. The analysts gave Warner Bros. Discovery a $22 price target.
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